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Andorran Bank Fights U.S. Treasury Allegations of Money Laundering

Oct. 7, 2015 3:43 p.m. ET

Foreign banks are fighting back against the U.S. Treasury department’s power to cripple lenders suspected of laundering money.

On Wednesday, owners of Banca Privada d’Andorra Group became the second group of bank shareholders in recent months to file a lawsuit asking the U.S. Treasury’s Financial Crimes Enforcement Network to explain why it accused their lender of laundering money.

Earlier this year, the small Andorran bank was seized by its regulators, following FinCEN’s allegations and was frozen out of the U.S. dollar market. On Wednesday, the Cierco family, which have a controlling stake in BPA, said FinCEN “had no legitimate basis” to accuse it of money laundering. The Ciercos are a prominent business family in Andorra.

The family alleges in the lawsuit filed in Washington, D.C., that BPA was punished because FinCEN was frustrated that Andorran authorities weren’t implementing wider changes to their anti-money-laundering rules. The Ciercos demanded FinCEN rescind its notices against the bank.

A FinCEN spokesman declined to comment.

The 2001 Patriot Act gave the Treasury Department a unique power to slap foreign financial institutions and countries it thinks are laundering money with a “primary money laundering concern” designation, which often effectively freezes them out of the U.S. financial system. While the measure has been used less than 20 times since then, it has had devastating effects on the institutions involved.

The BPA suit comes just over a month after a small Tanzanian-based lender, FBME Bank Ltd, was granted a rare injunction to block a FinCEN final rule which would have officially locked it out of the U.S. financial system. A federal judge ruled FBME should have more access to the evidence FinCEN used to recommend the bank be shut out of the U.S. financial system. FinCEN offered to refile its final notice to address procedural issues raised by the judge, a move FBME’s lawyers are challenging.

Over the past 12 years, the Treasury has used the statute, known as 311, to hit banks with little connection to the U.S.

The so-called 311 statute was written in an ambiguous way that left its use “wide open,” according to a memoir by former top Treasury official Juan Zarate, allowing U.S. regulators to clamp down on a foreign bank without having to prove the institution was criminally culpable. Under the law, the Treasury must consult with other U.S. regulators when making the decision.

FinCEN tends to target small banks in far-flung countries, says Stephen Heifetz a partner at Steptoe & Johnson LLP. U.S. government officials “don’t issue the death knell for systemically important institutions in allied countries,” he said.

The Treasury designation is supposed to go through a bureaucratic rule-making process, where the targeted bank and others could state their case against a preliminary blacklisting decision. But in practice the maximum damage is done to a bank soon after a preliminary decision is filed, according to lawyers and experts.

The Treasury has only issued a final rule in three of 10 cases against financial institutions in the past decade. The process of pushing through a ruling can take years. Last month, FinCEN said Lebanese Canadian Bank SAL was no longer a money laundering concern because the bank no longer existed. The allegation was made in 2011 and a final notice was never issued. Challenging the ruling in court is complicated, as much of the evidence FinCEN uses is classified, according to court documents.

In March last year, FinCEN accused Banca Privada d’Andorra Group of laundering funds for criminal groups. The bank’s shareholding family said in an interview with The Wall Street Journal at the time that the U.S. authorities hadn’t previously warned them of any problems at the bank. They only learned of FinCen’s intentions one hour before the notice was published.

The impact was immediate, as banks including HSBC Holdings PLC quickly froze BPA’s correspondent bank accounts, according to the lawsuit and a previous report by the Journal. Foreign banks use correspondent accounts with U.S. banks to process transactions and clear dollar payments.

BPA’s Spanish business subsequently filed for bankruptcy and its Andorran unit was seized by regulators, according to the Ciercos. BPA’s main shareholders contend that FinCEN refused to explain their actions or why it imposed the harshest penalty possible against the bank.

The Ciercos allege in the lawsuit filed on Wednesday that U.S. authorities want to punish BPA as part of an effort to force Andorran authorities to implement tighter money laundering controls.

The principality of Andorra sits in the Pyrenees mountains between France and Spain. The country has a small and thriving banking industry that caters primarily to rich individuals.

Following the FinCEN notice, Anton Smith, attaché for economic affairs at the U.S. embassy in Madrid said during a conference that Andorran authorities were slow to react to U.S. concerns and that a hammer needed to be brought down, according to a video of the speech. A spokeswoman for the U.S. embassy in Spain didn’t reply to a request for comment.

Both BPA and FBME have said their internal controls against money laundering were scrutinized by major consulting firms including, KPMG LLP.

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